Econ 488: The Advanced Macro Adventure!

Blinder, Alan S. 1994. “On sticky prices: academic theories meet the real world.” In Monetary Policy, ed. N. Gregory Mankiw, 117-154.  Chicago, IL: University of Chicago Press.

Blinder is a bit of a smartass. I don’t mean that as an insult in the slightest, but rather it made his article interesting to read. Here’s a fun quote, while I’m on the topic: “Yes, Virginia, there is an auction-market sector. But it is pretty small.” What is that supposed to mean? I want to move to a less rural state so people don’t automatically assume that I live on the border of WV. I was reading this article in Google Books, and the last part of it wasn’t included in the preview… including the conclusions. Here’s what I have from what I did manage to pillage from the internet:

In this article, Blinder presents empirical research on pricing behaviors of firms. Using the slave-labor that is graduate students, he embarked on a mission to survey 200+ firms on what they take into consideration when to deciding whether or not to adjust their prices to changes in demand or costs, in addition to how often they actually change their prices on behalf of these factors. The majority of firms are willing to adjust their prices 2-3 times per year. Surprisingly, firms respond equally as rapidly to increases and decreases in costs and demand, adjusting their prices on average within 3 months of the shock. The less statistically significant of these is the response to decreases in costs, since most firms are unlikely to be fortunate enough to have decreased costs.

The second part of Blinder’s research deals with testing whether or not specific theories on the behavior of the firm enter into firms’ thought process when deciding whether or not to change their prices. To do this, the researchers paraphrase the general idea of the theories and ask their subjects, on a scale of 1-4, how important the implications of that theory are in their decision making. He decided which theories to use based on their popularity at conferences and within economic literature.

The most important theory relates to oligopolies, where firms are reluctant to be the first to change their prices, and will therefore wait for other firms to change theirs first to avoid losses. Firms are less likely to raise their prices until costs rise, meaning they maximize the returns from an outward shift in demand as much as possible before the rising price of inputs forces them to raise their prices to maintain their profit maximization. The third most important, which is rather frightening to me,  is that firms are more likely to adjust delivery lags, service or product quality in response to a shock. This is where you get things like Toyota using low quality bolts in its cars to cut costs and avoid raising prices (I heard that rumor from a Toyota owner and a car-fiend who apparently has no qualms with lying to me… so I’m not sure of its veracity and don’t have enough interest to find out).

The least influential theories were beliefs that customers judged quality based on price, lags based on bureaucratic influences, and firms’ greater likelihood of adjusting their inventory stocks than their prices. That last one was from Blinder’s 1982 paper, so it must have been rather disappointing to discover that it had minimal significance in the real world. The remainder of the paper has to do with how Blinder manipulated his data in regression analysis. Instead of wading through his thought process, I decided to jump to the conclusion and work my way back… only to discover that Google Books had hidden the conclusion from me. Which made me angry.